Industry response to COAG Communique

A joint response to the COAG Energy Council outcomes by the Energy Networks Association and the Australian Energy Council.

The fifth COAG Energy Council met in Canberra on 19 August and provided “a timely opportunity to discuss recent developments in South Australia and to strengthen cooperation between state, territory and federal governments to ensure energy markets remain stable and secure”[i].

Media commentators subsequently welcomed the meeting as a renewal of support for energy market reform[ii]. This was the first meeting of the COAG Energy Council since December 2015.

The key areas of focus nominated for the Ministers going into the meeting were:

• Adaptation to the transformation of energy markets, ensuring a greater use of renewables and new technologies, such as battery storage, can be effectively integrated;
• Gas prices and supply, including consideration of the recommendations stemming from the Australian Energy Market Commission (AEMC) review and the Australian Competition and Consumer Commission’s (ACCC) report into the competitiveness of wholesale gas prices; and
• Ensuring energy investments are made in the long-term interests of consumers.

We outline below the outcomes from the COAG Energy Council’s Communique and assess its implications.

Communique Outcome

Gas prices and supply
1. A comprehensive domestic market reform package to lift competition. This is based on the ACCC and AEMC reports into the east coast gas market. It includes:

• Better information for trading in the market;
• Creation of trading hubs in the north and south;
• Easier access to transport infrastructure;
• Better pricing information; and,
• Encouraging more gas supply and more gas suppliers, taking account of each jurisdiction’s circumstances.

2. A gas reform group to be chaired by Dr Michael Vertigan AC will work to implement the reform package and work with industry and gas users on how to achieve more competitive supply.

3. Ministers noted that a key issue for gas market reform is to increase the overall supply and the number of suppliers.

4. All states, except Victoria, adopted an implementation plan for the Gas Supply Strategy to focus collaborative efforts on regulatory and scientific issues associated with increased onshore gas.

Response

Australian Energy Council
The Australian Energy Council (AEC) is supportive of plans to provide more information to inform gas market participants’ trading decisions and recommends that steps be taken to ensure that any systems developed are common across both pipelines and pipeliners, which would reduce the cost to the industry of developing systems to access this data.

In relation to the proposed new trading hubs, AEMO implemented a Gas Supply Hub at Wallumbilla in Queensland in March 2014, to provide a centralised trading, settlement and clearing facility with the aim of improving wholesale trading.  There would be value in allowing the hub to operate for a longer period before introducing more changes to that market.

The appointment of Dr Vertigan AC is welcomed. It is critical that the reform group utilises the expertise of industry participants in designing the detail of any changes to gas markets and regulations. Reform should be in a staged manner with regular assessment against the National Gas Objective and the need to provide a positive return for market participants’ investments.

The key issue for the gas market, as noted by the Ministers, remains overall gas supply. Current restrictions on onshore gas development are a major impediment. We support a consistent national approach and for that reason the collaborative approach of states (except Victoria) on the regulatory and scientific issues on developing more onshore gas, is welcome.  The AEC is hopeful that Victoria will reconsider its moratorium on both conventional and unconventional onshore gas.

Energy Networks Association
The agreement of all Energy Ministers – other than Victoria – on an implementation plan to increase onshore gas supply by addressing regulatory and scientific issues is welcome. Natural gas is an important part of a complementary energy mix for many Australian households and small business and the removal of unnecessary roadblocks to the timely development of new gas supply sources to reduce price risk to industry, businesses and households is an imperative for Australian governments.

 Communique Outcome

Review of limited merits review
1. Senior Committee of Officials will complete a review of the Limited Merits Review regime by December.

2. The review will assess the effectiveness of the LMR regime, including the role of the Australian Competition Tribunal.

3. There will be a public consultation process to help inform advice to the Council at its next meeting.

Response

Australian Energy Council 
We support the review process given it reflects concerns from stakeholders about the asymmetrical nature of the current LMR (which appears to systematically favour the network businesses).

The AER has applied to the Federal Court for a judicial review of the Australian Competition Tribunal decisions. It is a process that could help inform the review and potentially require a further response.  However, a court outcome may not be concluded by December.

Energy Networks Association
Australian Energy Ministers confirmed in 2013[1] that access to limited merits review is in the long-term interests of consumers, including by:

• providing a robust review mechanism that encourages increased stakeholder confidence in the regulatory framework;
• providing an accountability framework that drives continual improvement in initial decision-making; and
• achieving the best decisions possible by ensuring that the review process reaches justifiable overall decisions against the energy objectives.

Customers rely on efficient debt financing and re-financing of approximately $7bn per annum. The ability for customers and networks to access limited merits review has been supported by the Australian Energy Regulator (AER), the Productivity Commission, the recent independent review of Energy Market Governance, the COAG Energy Council and the Administrative Review Council.

The significance of this issue is highlighted by the recent Royal Bank of Canada survey of over 30 investors in Australian utilities, which found that 85% agreed or strongly agreed that merits review is crucial in ensuring accountable and transparent decision-making by the AER. The importance attributed to this accountability mechanism has substantially increased since 2013 (61%).[2]

The energy network industry considers that there are genuine opportunities to enhance the existing review scheme.

Communique Outcome

Energy market transformation
1. The AEMC will monitor the impact of emerging technologies on networks and report on any changes needed to regulatory frameworks.

2. A rule change will be submitted to promote the contestable provision of services from emerging technologies.

3. Three consultation papers are to be released on:

• Appropriate regulatory frameworks for stand-alone systems;
• Approaches to registration of battery storage systems; and
• Level of consumer protections needed for energy supply products and services behind the meter.

4. Officials will provide advice on actions that will support the implementation of cost reflective network tariffs, for consideration and decision by Ministers at the December meeting.

5. Review the regulatory test for investment for new transmission assets to ensure it is effective in the current market environment. There will be consultation and officials are to report back by the end of the year.

6. Consideration of the economic and operational impacts of existing state and territory emission reduction policies to be included in official advice from officials on the potential impact of carbon policies on the energy sector. This is intended to inform the council consideration of how to better integrate energy and emissions policy.

Response

Australian Energy Council 
1. Work in the area of energy market transformation is timely. It is important to consider the emergence of new technologies and their development so that we are able to properly assess the most appropriate regulatory framework to support the introduction of new technology efficiently and at the lowest possible cost. The AEC maintains that this is best achieved through mechanisms that support genuine competition, and impose minimum regulation.

2. Consideration of greater contestability is timely. It is important to ensure the most appropriate regulatory framework. While we are yet to see the details of the proposed rule change, we welcome the logic of the proposal: it is critical to promote genuine contestability of services given the emergence of new technologies.

3. The consultation papers are welcome as they provide the opportunity for stakeholder input to COAG’s deliberations.

4. We support more cost reflective tariffs but note that the Victorian Government has put a stop to greater use of cost-reflective pricing. Greater cost-reflectivity of tariffs can assist with improving the efficiency of the electricity supply system and reduce the level of cross-subsidisation inherent in flat tariff structures. A key factor in the successful implementation of cost-reflective tariffs is the ability of small consumers to understand and react to them. There will be a process of discovery as retailers work out what types of offers suit different customers.

5. The review of the regulatory test for investment for new transmission assets is timely. There are both a wider range of technologies available that offer non-network alternatives, as well as potential for greater interconnection. The test also needs to address the fact that these are large, very long-term investment proposals in a dynamic and uncertain environment. It is critical to get the test right to ensure the most effective market investment – whether in network, generation or other assets. In considering additional interconnection it is important that there be adequate consideration of its impacts on the current and future availability of generation sources in both connected regions. In short, it is critical that it improves system stability, rather than reduces it.

6. We strongly welcome consideration of the economic and operational impacts of state and territory emission reduction policies. State and territory based renewable energy targets distort both the energy market and the market for federal renewable energy certificates. These schemes can additionally impact reliability and the cost of electricity supply. This work should help to highlight the benefits of a nationally consistent approach.

Energy Networks Association
The COAG meeting outcomes on energy market transformation are a strong reflection of the challenges and opportunities presented by a rapidly changing energy system.

Australia’s energy networks are undertaking diverse trials in deploying the technology and services that customers want – including large scale and behind-the-meter deployments and partnerships, to deliver lower cost outcomes for customers.

In the forthcoming policy debates on ring-fencing and the boundaries of competition, the real focus should be on the long-term interests of customers, as per the National Electricity Objective, including avoiding the risk of consumers paying real higher costs now for the promise of uncertain benefits in the future.

This must move beyond deciding what monopoly businesses can and can’t do and extend to how contestable frameworks will be established, and over what timeframe, and how customers will benefit from the provision of services under this framework.

Energy networks have a significant role to play in establishing a platform for competition, on a level playing field, by downstream or upstream customers in competitive markets. In a practical sense they also need to manage the technical aspects of emerging technologies connecting to the grid ensuring safety and reliability for all energy customers.

Australian governments have an important role to play in ensuring all electricity customers can realise the benefits of network tariff reform and a continued focus on implementing this agenda is important. Energy networks are transitioning customers to fairer, more efficient network tariffs in a measured, consultative way. Successful implementation of this transition will lower system costs over the long term and enable customers to better manage their own energy costs.

The ENA welcomes the decision to review the regulatory investment test for transmission to ensure it is effective. There is a need to ensure the main mechanism for assessing new interconnectors in the NEM – the Australian Energy Regulator’s Regulatory Investment Test for Transmission (RIT-T) – is fit for purpose as the energy system transforms, and doesn’t tie up investment decisions in red-tape and reduce the capacity of the system to respond to changing customer needs and technologies.

All infrastructure must demonstrate its benefits, but we know that a cleaner energy future will rely on an efficient and interconnected grid.

Greater interconnection in the NEM can improve wholesale market competition and support intermittent renewables with low emission energy sources, like gas-fired generation, and new technologies, like battery and solar thermal storage.

Given many of our current challenges are a direct result of narrow policy development without assessing system impacts, the ENA welcomes the decision to assess the economic and operational impacts of existing state and territory emission reduction policies.

There is strong evidence that poorly coordinated emissions policy will push up costs to households and businesses – and technology neutral policies can save customers over $200 per year from 2020 to 2030.

One practical action the COAG Energy Council could take to support integrated carbon and energy policy is to establish a new, institutional step for assessing energy market interventions. Just as governments already subject new initiatives to a Regulatory Impact Statement, proposed carbon and energy policy initiatives should be independently assessed for their impact on the National Energy Market, network efficiency and the long-term interests of customers.

Communique Outcome

Energy market and consumers
1. The Council noted that there had been strong progress to implement measures in the National Energy Productivity Plan (NEPP).

2. To ensure continued momentum it has allocated substantive funding to progress key measures, particularly to improve building standards and compliance, accelerate building ratings tools and work to make it easier to consumers to choose new energy services such as flexible tariffs.

Response

Australian Energy Council 
While also noting the work of the NEPP, the AEC believes that development of a productivity dashboard of initiatives to better monitor the impact of developments should be considered.

Energy Networks Association
ENA supports measures to promote improvements in national energy productivity. As a practical step, effectively communicating the benefits and opportunities offered by tariff reform for energy customers will be a key component of the successful transition to fairer network tariffs. The commitment of funds to support informed customer choice and decision making, particularly regarding new tariff options, is welcome and the ENA looks forward to working with officials in delivering this important work program.

Communique Outcome

Review of Governance Arrangements for Australian Energy Markets
The Council agreed to provide for additional AEMC Commissioners and provide for greater use of the expedited rule change process, as part of wider measures to strengthen the AEMC’s governance structure and future capacity.

Response

Australian Energy Council 
This continues the progress on recommendations made in the final report of the expert panel chaired by Dr Vertigan AC which reviewed the governance arrangements for Australian energy markets.

Energy Networks Association
The energy market governance review produces important recommendations for the long-term performance of key energy institutions. Industry looks forward to the implementation of the full package of governance measures, and their contribution to enhanced energy market oversight.

Communique Outcome

Matt Zema Scholarship
The Council acknowledged the lasting contribution of Matt Zema, inaugural Chief Executive Officer of the Australian Energy Market Operator. To recognise his contribution to energy policy in Australia, the Council agreed to establish the Matt Zema Energy Studies Scholarship to open in early 2017. The Zema Scholarship will fund innovative post-graduate research projects contributing to the operation of Australia’s electricity and gas markets.

Response
Both the AEC and the ENA welcome the establishment of the Zema Scholarship as a fitting tribute to the enormous contribution Matt Zema made to the modern energy system in Australia.

Matt was widely esteemed as a leader of the Australian and international energy sector. We valued Matt’s forthright engagement, his deep expertise and his many achievements in shaping the national energy market as we know it today. We acknowledge his contribution over 30 years to the Australian community.

[1] SCER Decision Regulatory Impact Statement, June 2013

[2] RBC Capital Markets ASX Network Utilities Investor survey on regulation, 2 August 2016

[i] http://www.joshfrydenberg.com.au/guest/mediaReleasesDetails.aspx?id=237

[ii] Australian Financial Review, “COAG lays groundwork for national energy reform”, 22 August 2016